With over 50 percent of Argentina’s internal energy consumption derived from natural gas, it’s clear that it depends heavily on the fuel for residential, industrial, and transportation purposes. But Argentina is on the brink of a major energy crisis. Oil production has peaked, natural gas reserves are not being replaced, natural gas is not attractive to foreign investors, and major electricity shortages are looming, with some blackouts already being reported. Additionally, imported Bolivian gas prices continue to rise to such a point that capital-intensive projects like LNG regasification terminals are beginning to look attractive. But such projects are years away.

Natural gas gained prominence in Argentina’s economy after the economic collapse of 2001. Government mandates kept prices artificially low, which drove demand up. In 2003, price caps seemed like a prudent approach, because Argentina was a natural gas exporter and gas reserves were at an all-time high of 27 trillion cubic feet. However, as 2008 begins, Argentina faces a gas shortage that will inevitably take a toll on the economy.

Figure 1 shows the drastic rate at which reserves are being depleted and the steady increase in gas consumption.

Figure 1. Proved reserves are rapidly declining while
internal natural gas consumption continues to increase

The trend of proved reserves and internal gas consumption after 2003 shows that reserves have declined 2.6 tcf per year, while internal consumption has been increasing by about 40 billion cubic feet per year. If linear growth is assumed and all of Argentina’s natural gas reserves are used to satisfy internal consumption, then supplies will only last until 2013 – just five years from now! This calculation assumes that natural gas imports are halted and reserve additions stop. Such a scenario will not occur, but this calculation illustrates that the current natural gas shortage in Argentina will likely only get worse.

From 2005 to mid 2007, the number of drilling rigs did not surpass 85. Only 5 percent of the wells are considered exploratory, with the rest classified as developmental. This lack of drilling activity shows that Argentina has not been adding gas reserves, and the main goal of current drilling activity is to accelerate production. The maturity of the onshore gas basins will not provide Argentina with the natural gas needed to meet internal demand, and a natural gas shortage by 2013 could be a reality.

The prospect of offshore production is possible, but will not be realized anytime soon. The consulting firm IHS has reported that Enarsa, the state offshore exploration company, will pay GX Technology about $30 million to acquire 6,500 miles of 2D seismic from the Rio de Plata and the Burwood Bank areas. The seismic work will be done in the deepwater and on the continental shelf. Offshore seismic data was last obtained in 1970. Given that long interval, there is an enormous amount of work to be done before any serious offshore exploration gets underway.

Investment is desperately needed in current infrastructure to develop, exploit, and transport onshore and offshore natural gas reserves. However, attracting foreign capital will be extremely difficult due to foreign investor lawsuits against the government. In the early 1990s, Argentina signed dozens of bilateral investment treaties with other governments to entice foreign investment. The agreements permitted investor lawsuits against the states, which have allowed investors to bypass domestic courts and file suit directly against Argentina through international tribunals like the World Bank’s International Center for the Settlement of Investment Disputes (ICSID). Many foreign energy companies (mostly American) that were attracted to Argentina back in the 1990s are currently trying to cut their losses and flee Argentina, as a result of the 2003 economic meltdown.

For example, CMS Gas Transmission has sued the Argentine government for its refusal to adjust tariffs during the economic crisis. ICSID ruled in favor of CMS because Argentina had breached the “obligation of fair and equitable treatment” clause in the bilateral investment treaty. Argentina’s government was found liable for $133 million in losses to CMS. Similarly, ICSID awarded San Diego-based Sempra Energy $172 million because of the utility price freeze imposed by the government. Low gas prices reduced the value of Sodigas Pampeana and Sur, the two Argentine gas distribution companies that Sempra Energy had purchased from La Nación.

Other companies currently suing Argentina include Exxon Mobil. Last year the Texas-based law firm Fulbright and Jaworski estimated that at the beginning of 2007, 11 energy companies were seeking arbitration on legal claims against Argentina, worth approximately $8 billion.

With its abundance of natural gas (about 26 tcf) Bolivia has plenty to be exploited. But under President Evo Morales Bolivia has been ratcheting up its gas prices, and that has soured the relationship between the two countries. Figure 2 shows U.S. and Argentine wellhead natural gas prices, and the import price Bolivia is being paid.

Figure 2. Bolivia is being paid more for imported natural gas
than Argentine producers, thanks to price caps

Government price caps have kept natural gas prices artificially low relative to U.S. wellhead prices. This has driven demand in Argentina to a point where imports are necessary. The 2001 dip in Argentine gas prices was due to the economic collapse. Price caps have largely shielded the populace from the increasing costs of electricity and compressed natural gas, which is used for transportation. The negative side effect has been that expensive imported Bolivian gas is required to meet domestic demand, and foreign investors do not want to risk their capital in an economy that so heavily regulates gas prices.

Bolivia is simply trying to maximize profits, and it can do so because for the moment, Argentina has no alternatives. After considering the prospect of paying $6 per thousand cubic feet of imported gas, Argentina has started to look for other alternatives. For example, recently in Petrotecnia, the country’s official oil and gas publication, Arturo Franisevich calculated that the city-gate price for imported liquefied natural gas would be about $4.80 per mcf, should a regasification terminal be built in Argentina to accept Nigerian LNG.

This is clearly a superior alternative to the high prices currently paid to Bolivia. However, just like offshore exploration, it will take time to obtain the permitting and build such facilities. In the meantime Argentina is left seeking solutions to its natural gas shortage.